Hang on Indian Rupee, here’s Raghu to the rescue!

No doubt, India’s economy is taking a severe beating, and there are prophets of doom all around. But a new star on the horizon in the shape of a new governor of the Reserve bank of India is shedding a glimmer of hope. Raghuram Rajan has actually managed to turn the falling Indian Rupee around!

Reserve Bank of India governor Raghuram Rajan is the new superstar in the international world of finance. Under him, the Indian rupee has been transformed from ‘untouchable’ status to becoming the world’s favourite currency after just a month in office. As intensifies efforts to quell inflation and lure capital, business papers in India are singing his praises.

Investors selling dollars to buy rupees earned 10 per cent since Rajan took over on September 4, the most among 44 currencies tracked by Bloomberg and a turnaround from a 2.8 per cent third-quarter loss.

In the past month, investors have become more confident in the rupee than for any currency in Asia or the BRIC nations, which also include Brazil, Russia and China. “We no longer have a crisis of confidence,” Geoffrey Kendrick, the Hong Kong-based head of Asian currency and rates strategy at Morgan Stanley, said to one of India’s pink papers. “The new RBI governor has market credibility. For now, he’s saying all the right things.”

In August, the rupee sank to an all-time low after India’s current account deficit grew to a record $88 billion in year April 2012- March 2013. Volatile oil prices threatened even more inflation for India, a nation that imports 80 per cent of its oil.

Rajan, 50, has pledged to do whatever it takes to stabilise the currency. Among his first acts, Rajan unexpectedly raised the benchmark interest rate last month by a quarter-point to 7.5 per cent.

The rate boost helped drive the rupee to 61.535 per dollar in London, an 11 per cent advance from the low of 68.845 on August 28. In the five days after Rajan took office, the currency strengthened a total of 6.9 per cent, more than in any month since January 2012, data compiled by Bloomberg show.

Deutsche Bank AG and Citigroup, the world’s two biggest foreign exchange traders, recommend buying the rupee, in the forwards market and by selling the Singapore dollar. Morgan Stanley’s Kendrick forecasts the rupee will rally to 58 per US dollar in coming months.

Rajan, a former International Monetary Fund chief economist credited with predicting the 2008 global financial crisis, also announced a window for banks to raise new foreign-denominated deposits and debt at a cheaper rate, a move that already helped attract $5.6 billion of inflows, he said on October 4 in Raipur.

The new RBI governor is very market savvy and “has a lot of proven expertise in the market,” Ron Raychaudhuri, a London based fixed-income manager at Lombard Odier Investment Management, which oversees $43 billion, told the media.

The steps he has taken have done a considerable amount to stabilise the rupee

India’s 10-year government bonds yield 8.64 per cent, compared with 2.72 per cent for US Treasuries, 0.67 per cent for Japanese debt and 1.89 per cent for German bunds. Traders selling dollars to buy the Brazilian real had the second best returns after rupee investors since September 4, with a 9.2 per cent gain as of Monday, data compiled by Bloomberg show. Carry trades buying the New Zealand dollar received 6.1 per cent, while the Polish zloty gave a 5.2 per cent return.

Emerging market assets, including the rupee were given a boost September 18 when Federal Reserve chairman Ben S Bernanke surprised markets by announcing the central bank wouldn’t yet cut the bond purchases it uses to pump money into the economy.

“Rajan is trying to ring-fence the rupee problem and the actions seem fairly successful so far,” Chia Woon Khien, a Singapore-based strategist at BNP, said. “He doesn’t want further rupee strength because the economy is weak.”

The IMF estimate says India’s growth for the year through March 2014 will be 3.8 per cent, down from 5.6 per cent, citing weaker manufacturing and monetary tightening. So it’s a long haul ahead.